real estate

Garth Turner-What Were We Thinking

This will be a simple post. At the end of the first serious week of 2014 the Canadian dollar was diving to the 92-cent level. The worst performance in years. It came on news the country has been losing jobs at the rate of 10,000 a week. Our unemployment rate’s gone up, as that in the US falls.

Our trade deficit was nine times worse than expected. Business investment has fallen badly. The central bank is worried about deflation. Energy and mining companies punted 8,000 people last month. Schools laid off more than 18,000 teachers, assistants and staff.

Yet another survey was released showing what real estate’s done to this country – sucked off all the cash. BMO says 60% of people won’t make any RRSP contribution this year because 70% say they have no money or are directing any extra money elsewhere (like renovating). Two-thirds of all contributions will be under $5,000 and the average is just over $3,500. Pathetic.

Our unused RRSP contributions are now approaching $1 trillion. Thirty per cent of retirees have a mortgage. Half the people with TFSAs have nothing in them. Over 40% live paycheque-to-paycheque.

Depressing? Damn right it is. This is financial suicide by real estate. Once the asset where the middle class has stuffed 85% of its net worth inevitably retreats, you’ll see what’s left. Debt. Piles of it. And precious little else for the average family.

Already the economy is being pulled back by consumers who borrowed way too much to acquire houses, with little left for appliances or investments. Suddenly a high-cost country with ridiculous real estate prices where workers need high wages just to survive is no longer competitive. Factories shut. Exports fall. Productivity drops. Employers retrench. Consumer spending fades because mortgage payments come first. It’s a vicious circle, and the world notices. The dollar sells off, making consumer prices rise.

Without good jobs, good wages, low interest rates and sustained consumer confidence, there’ll be no robust real estate market. It wasn’t subprime loans, higher mortgages or dinks on Wall Street responsible for the US housing collapse. The wheels only came off as unemployment ticked higher, through the 7% mark. By the time it hit 10%, the country was on life support, houses were 32% cheaper and the middle class was gutted.

Now, consider these facts, reported Friday, January 10th:

  • Last time Canada’s jobless rate was higher than the US, as it is now: 2008.
  • Number of full-time workers laid off or fired last month: 60,000. Part-timers added:14,000
  • Amount job creation fell in Canada during 2013: 65%
  • Net new full-time jobs added nationally in all of last year: 19,300.
  • Number of net new unemployed people last year: 24,000
  • Number of employees laid off last month by private companies: 26,300
  • Number of employees added last month by government:  18,200.
  • Jobless rate in Ontario: 7.9% (just soared from 7.2%)
  • Labour force participation rate: 66.4%  (The lowest in a decade)
  • Number of Canadians who think their job is not secure: 54%.

When people worry about employment, it’s irrelevant how cheap mortgages are, or might become. Granite doesn’t matter. Or moving up. Or what your girlfriends say. Or the Remax guy.  All that scared people care about is retreating to safety.

I may have to revise my housing forecast

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